M&M Proposition 2: Bellamee Ltd Has a Required Rate of Return

question 78

Multiple Choice

M&M Proposition 2: Bellamee Ltd has a required rate of return on its assets of 12% and a cost of debt of 6.25%. Their current debt-to-equity ratio is 1/5. What is its required return on equity if its debt-to-equity ratio changes to 2/5 and this increases the required rate of return on their debt to 7%?

• A) 14%
• B) 14.25%
• C) 14.50%
• D) 15%

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